Sources and Centers of Cyclical Movement in Real Wages: Evidence from Panel Data

Abstract

Despite numerous empirical studies of real wages over the business cycle, economists have yet to reach a consensus on the direction or degree of cyclical movement in the real wage. Both classical and neo-Keynesian models predict a countercyclical pattern based on the diminishing marginal product of labor. However, observed patterns have frequently run counter to this prediction. Furthermore, the findings appear quite sensitive to the particular techniques of individual studies. Yet the debate remains lively, reflecting the central role that real wage movements play in discussions of both theory and policy. The dual significance of the topic is clear. In theoretical debates, neoclassical, Keynesian, and Post Keynesian schools are faced with the challenge of developing models consistent with observed cyclical patterns. In the world of policy, the consequences of restrictive and expansionary fiscal and monetary actions are crucially affected by the cyclical behavior of real wages. Recently, statistical techniques and data availability have allowed a disaggregated approach to the empirical analysis. Although disaggregation provides valuable information, few studies of wage movements over the business cycle have used disaggregated data.' In